Why Buying CNet Makes Sense for CBS

What’s that saying? One man’s meat is another man’s poison? JANA Partners didn’t think highly of CNet’s scattershot approach to diversifying into non-tech segments (amongst many other issues). CBS, on the other hand, found the very same TV.com, Chowhound, GameSpot, UrbanBaby, MP3.com and other properties valuable enough to pony up $1.8 billion, a 45 percent premium to CNet’s closing price yesterday. That works out to about $11.50 a share. As you might remember, JANA Partners had acquired enough shares to launch a campaign to replace the management and the board. Now it might finally get its wish.

Nevertheless, no one saw this coming; Yahoo was thought to be a likely buyer. But we should have. Why? One man: Quincy Smith, CBS Interactive’s president. He used to be the banker who was quite intimate with CNet when he worked at Allen & Co., the New York boutique investment house. He understood their business, strategy and of course, their problems. He said as much today: “[I]t’s going to be great to work with Neil and his team, many of whom I have known for many years.”

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What I think CBS needs to do is come to San Francisco with an industrial-sized equivalent of a corporate vacuum cleaner. First, it need to cut the sales and marketing head count by almost 15 percent. Second, it needs to cozy up to Google, Yahoo or Microsoft and get them to commit to an advertising deal. (The New York Times has one such deal with Yahoo, for instance.) And most importantly, it needs to clean up the site and make it SEO-friendly. I know Smith knows how to do this. And this might mean kicking out some of the people with which he has worked very closely.

This deal could go wrong quite quickly, due to the bureaucratic nature of the San Francisco shop. But still, I like the big, bold bet. Hell, with $405 million in sales and $176 million in profits, CNet seems a whole heck of a lot cheaper than Last.fm, which cost CBS $280 million. CBS’s current line-up of properties includes CBSSports.com, CBSCollegeSports.com, last.fm, Wallstrip and MobLogic, along with several other news-related properties.

Taken at face value, it might seem like a crazy deal, but in fact it’s a calculated, smart and well thought-out move.

Why this deal makes sense:

* CBS is buying media page views, not social networking page views, which are to tough to monetize, as indicated by recent research reports.
* CBS gets not just a footprint in technology — a growing mainstream opportunity — it also gets non-tech sites that can get some great push from CBS’s non-Internet properties.
* CBS is making a strong effort to give a proper facelift to all its operations and it needs a dot-com property with sizable traffic.
* Quincy Smith is a big believer in communities on the web, and one thing that CNet has not been able to do is build big communities, even despite sizable audiences. I expect this is going to be one of the top priorities for the newly combined company.
* CNet is easily fixable and had a great brand.
* Most importantly, this puts CBS ahead of NBC, ABC and others that have what I think are bumbling Internet/web strategies mired in legacy self-interests of individuals.

What its long-term implications are:

A combined CBS-CNet is basically going to push other networks and old media into action. Don’t be surprised if it sparks an irrational frenzy of buyouts. From Digg to Sugar Publishing, anything media could be in play soon enough.